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The Multi-Family Housing Property Tax Exemption (MFTE) program began in Washington State in 1995, codified as RCW 84.14, to incentivize multi-family residential development in “residential targeted areas,” for Washington’s cities. All cities in Snohomish County may offer an MFTE. The MFTE is an optional tool; developers are not required to request it.
The state program authorizes 8-, 12- and 20-year property tax exemptions to encourage the development of multi-family housing. Staff’s recommendation will be to amend the code so that to qualify for the 8-year exemption at least 10% of the units must be affordable to low-income households (households that earn 50-80% of the Area Median Income). Staff will also be recommending amending the code so that to qualify for the 12-year exemption at least 10% of the units must be affordable to low-income households and 10% of the units must be affordable to very-low-income households (households that earn 30-50% of the Area Median Income). Staff are not recommending a 20-year exemption. The MFTE only exempts the value of the new multi-family portion of construction from being taxed during the term of the exemption. The value of the land (which will increase with the new development) and the value of the commercial construction are still taxed at the regular rate. The MFTE is temporary and when the exemption expires, the property and improvements are taxed at their fully assessed valuation.
A MFTE does not result in low-income housing “projects.” Through planning and land use regulations, it ensures units are built to meet specific design standards and are integrated with market rate units, a model recognized as being the more successful approach towards addressing housing affordability.
It is difficult to project exactly how an individual property owner’s property taxes will be impacted given the various taxing districts and levy rates within the City of Snohomish.
Here’s what we do know. In an annual report released by the Washington State Department of Commerce, 20 cities across the state issued MFTE certificates in 2021. The total exemption for one year ranged from $13,000 to $2.6M per city, with the average exemption being $823,382. Based on information provided by the Snohomish County Assessor’s Office, city staff calculates that for every $1 million of exemptions approved, the average valued home in Snohomish ($468,700 in 2022) would see an estimated increase of 50 cents per year on the property tax bill. As a reminder, the MFTE only applies for the 8 or 12 years authorized per development.
Discussions about affordable housing and incentives to provide and encourage the growth of affordable housing options have been underway in the City for several years and the Pilchuck District was already designated as an MFTE in 2011. The City has been reviewing options to ensure any incentives are not too generous to a developer, resulting in what may be viewed as a “give-away.” Council and City staff have studied and are learning from other Washington communities that have implemented a successful MFTE program, and consulted with the Snohomish County Assessor and the Alliance for Housing Affordability to understand how affordable options would affect the City’s tax base and taxpayers. City leadership is also working to ensure transparent and open communication with the public about the proposed MFTE.
The housing market has been rapidly changing in our City for the same reason we all love to call Snohomish home: beautiful surroundings, robust economy, great schools, a vibrant and tight-knit community, a bustling historic district, and an easy commute to the area’s major employers. The following is a snap-shot of just how things have changed:
Independent of the affordability issue, there are simply not enough apartments for rent in the City currently. For example, on Aug. 21, 2022, only five apartments were up for lease in the city. Three were 2-bedroom units and two were for 1-bedroom units.
The term “blight” has evolved from its genesis in the early 1900s to describe the spread of slums and disease. Blight also has a long-term racial legacy as the legal touchstone for many eminent domain actions that broke apart predominately BIPOC communities throughout hundreds of American cities. In short, blight today is defined as a physical space or structure that is no longer in acceptable or beneficial condition to its community. The City’s thoughtful approach to creating long-term, sustainable affordable housing solutions are working to combat future blight by ensuring the design of livable communities for all Snohomish families.
In addition, the MFTE will have a positive impact on the City’s finances because it will cause certain revenue sources to increase, including:
How much new development will occur in the Midtown District -- with or without the MFTE -- is extended there is merely speculative because there is no guarantee on the quantity and type. Ultimately, market forces will determine what happens in Midtown, such as the rental income a developer can expect to collect for their new project. Projects must “pencil out” to be built so developer’s costs are a factor. The current rental market means the most likely development in Midtown will initially be 3-4 story wood frame construction. This is supported by a market study conducted by the County for the Avenue D property. The 3-4 story wood frame construction is less expensive to construct than the speculated 5-story construction and results in much less dense development.
Additionally, there are approximately 19 acres in the Midtown District that currently have redevelopment potential. Even if all of those acres are redeveloped with 3-4 story wood frame construction, the result would be about 570 new units. However, this will not happen all at once (if it ever does) and construction would be spread out over many years. The land use restrictions for building in Midtown, including streetscape design that incorporates wider sidewalks and planting strips, adequate parking, and preferred architectural requirements reduces the amount of land that can be developed solely for housing.
Using the MFTE numbers reported by the Washington State Department of Commerce, the best case scenario for cities like Snohomish will likely be about 25-50 units built in any given year. The only cities in 2021 that built even close to 1,000 units were Seattle, Spokane, Kirkland, and Tacoma. That same year, the cities of Bellingham and Bremerton, which are much larger than Snohomish, built a little over 40 units each.
Commercial developers will not build any affordable units without the MFTE. Given that so many of the City’s neighbors have already established an MFTE, the City will be at a competitive disadvantage in attracting multi-family developers to build in Snohomish without the MFTE. The MFTE is a strong incentive for developers that can be the tipping point to greenlight a project. The MFTE is optional so some developers will choose to do their projects without it.
Rapid growth in the city and county has made housing rapidly unaffordable for young adults and families. The objective of adopting a MFTE is to provide affordable housing options for future generations to ensure the city remains vibrant, resilient, and retains the community’s reputation for providing a wonderful quality of life. It is also to provide an incentive to developers to build multi-family units in the Midtown District, which would increase the multi-family housing stock and add to the housing options available in the city, while stimulating development in the Midtown District.